The Daley Note: June 13, 2023
Operators of liquids pipelines have started filing annual rate adjustment worksheets with federal regulators, in many cases rolling a record 13.3% rate hike into tariffs as early as July 1, 2023.
The Federal Energy Regulatory Commission (FERC) in mid-May released its annual tariff adjustment for liquids pipelines (Oil, NGLs, Refined Products) that use indexed rates. Under the tariff structure, pipelines are allowed to increase transportation rates once a year to account for higher business costs reflected in the pace of inflation.
East Daley Analytics covered the latest update by FERC, noting the ceiling value of 1.133194, reflecting red-hot inflation in the 2022 calendar, is the highest increase ever for indexed tariffs. We use this information to update our company Financial Blueprints and commodity and market forecasts, such as the Crude Hub Model. Pipeline operators began updating tariff worksheets in late May. The new tariffs in most cases are effective at the earliest date of July 1, 2023.
While most pipelines have opted to take the full allotted hike, our research finds some nuances. The table represents a sample of pipelines systems; East Daley’s clients received a wider survey of pipelines in the weekly Data Insights. Please reach out if you are interested in receiving a wider sample of pipeline rates.
This year’s index adjustment comes on the heels of a then-record 8.7% adjustment in 2022, marking back-to-back records for the first time since FERC adopted the methodology in the mid-1990s. Like last year, midstream operators are adjusting rates depending on commodity and type of service. NGLs and refined products pipelines have mostly opted to take the full allotted hike, yet also are offering discounts on volume incentives, which typically apply to shipments above a specified volume threshold.
Refined products pipeline operator Magellan Midstream Partners (MMP) stated it would make an all-in rate adjustment on its core asset of 11%. Only 30% of the company’s refined products pipeline system is regulated by FERC; the remaining 70% uses market-based rates, implying MMP will take smaller but still substantial rate adjustments for services in these areas.
Crude service rates, particularly in the Permian, are unique to each pipeline. While all operators have opted to hike uncommitted service rates by the full 13.3%, committed service adjustments vary significantly, with rates increases ranging from 2% to 13.3%. At the high end of that range, rates for Cactus II’s anchor shipper (Trafigura) will jump the most on July 1. This is a stark change from 2022, when Cactus II raised the anchor rate by less than 1%.
Competitive transportation corridors like the Permian-to-Gulf Coast route seem to be offering committed shippers the biggest break. On the other hand, shippers without firm transportation agreements are getting the sharp end of the stick.
As East Daley highlighted in our 2023 Dirty Little Secrets report, transportation rates in the Permian likely bottomed out a year or two ago, translating to higher costs for shippers to move barrels to market. While midstream operators are by no means insulated from inflationary pressures, East Daley does believe the effects from this year’s FERC adjustment will provide a decent bump to these companies’ bottom lines.
For an updated financial outlook on these midstream companies, see our 2Q23 Earnings Previews (to be released at the start of July) – AJ O’Donnell Tickers: MMP.
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Review the Year Ahead in Dirty Little Secrets
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Dirty Little Secrets reviews the outlook for Midstream and commodity markets in 2023 and the years ahead. East Daley discusses the outlook for crude oil, natural gas and NGLs and the impacts to midstream assets in our 2023 Dirty Little Secrets annual market report. Click here for a copy of the 2023 Dirty Little Secrets report.
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